SAP reported Q1 earnings that, by most accounts, were in-line with Street expectations...
The Basics...
- Revenues of Euro 2.04B, 18% YOY growth (13% in constant currency)
- License revenues of Euro 528mm, representing 22% YOY growth (14% c.c.)
- Germany posted respectable growth of 8% (c.c.)
- Henning pointed to German companies being "ready to invest."
- U.S. growth of 15% (c.c.) was the lowest in six quarters
- Latin America (now under Bill McDermott's watch) had a monster upgrade deal which skewed YOY growth (100%+)
- Germany posted respectable growth of 8% (c.c.)
- Maintenance revenues of Euro 860mm
- Pro forma op margin was 22.4%, a 40 basis point improvement year-over-year
- EPS of Euro 1.02 represented 22% YOY growth
- Free cash flow of Euro 793mm, an 8% YOY decline
- SAP purchased 2.53 million shares during the quarter
- The company maintained existing FY06 guidance
- 13%-15% product revenue growth
- 15%-17% license revenue growth
- 0.5%-1.0% increase in full year operating margin
- Euro 5.80-6.00 earnings per share
The Nuances...
- U.S. license revenue growth was the slowest we've seen since 2004, which is to be expected given the the tough comparisons after a blistering 2005. That said, SAP offset that somewhat by a resurgent German result. Can Germany's recrudescence offset the U.S.'s deceleration?
- On a positive note, license revenue growth continues to outpace maintenance and service revenues (a key measuring stick when evaluating market share gains and the health of the market)
- Mendocino is "on track" to ship in June (final beta shipping next week), and will be highlighted at SAPPHIRE (which I'll be attending)
- SAP plans to launch an OnDemand version of All-In-One, possibly by year end
One Unanswered Question...
- Why change the market share metrics?
In past quarters, SAP has trumpeted its ever-increasing global market share, and prominently displayed those gains in the investor presentation. This quarter, SAP had nary a slide on market share. Further confusing matters, SAP offered the following disclosure in the official earnings release:
Based on software revenues on a rolling four quarter basis, SAP’s worldwide share of Core Enterprise Applications vendors, which account for approximately $16 billion in software revenues as defined by the Company based on industry analyst research, was 21.4% at the end of the first quarter of 2006.
In previous quarters, worldwide peer group share was provided based on a peer group of Microsoft Corp. (business solutions segment only), Oracle Corp. (business applications only) and Siebel Systems, Inc. The Company believes that after the large amount of consolidation that has occurred among the larger companies in the software industry, the peer group has become too small to provide an adequate metric for the purpose of measuring growth of sales share. Therefore, the Company will now be providing share data based on the vendors of Core Enterprise Applications solutions, which account for approximately $16 billion in software revenues as defined by the Company based on industry analyst research.
Typically, companies that are on top of the industry usually don't tweak market share metrics until they feel further share gains are unlikely.
Parting Thoughts:
As an SAP shareholder, I came away with a fairly typical feeling after Q1. We have to remember that Q1 is the low point for most enterprise software companies, and SAP in particular (they have a huge hockey stick Q4). By all accounts, the major product initiatives are on track (i.e., BPP, All-in-One hosted, Mendocino); SAP maintained guidance; the U.S. growth, while not as robust as usual, remains far better than its peer group; and they're adding shareholder value through an aggressive share buyback program.
Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained a long equity position in SAP.
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